Madras High Court
Commissioner Of Income-Tax vs K.P.V. Shaik Mohamed Rowther & Co. (P) ... on 23 December, 1997
JUDGMENT P. Thangavel, J.
1. At the instance of the Revenue, the following questions of law have been referred for the opinion of this Court by the Tribunal, Madras Bench "D", under s. 256(1) of the IT Act, 1961, hereinafter referred to as "the Act" :
"1. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the disallowance should be reduced to Rs. 40,000 in respect of the commission paid by the assessee to its employees ?
2. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that rule 6D of the IT Rules does not apply to directors and that no disallowance could be made under the said rule and consequently in sustaining the order of the CIT(A) deleting the disallowance of Rs. 12,751 made by the IAC ?"
2. The assessee, K. P. V. Shaik Mohamed Rowther & Co. (P) Ltd. Madras, is a non-industrial domestic trading company, in which public are not substantially interested. The assessment for the asst. yr. 1980-81 was completed by the AO on 19th July, 1983, but the same was set aside by the CIT, Tamil Nadu III, Madras, with a direction to make reassessment after disallowing the commission/service charges paid by the assessee to its employees in toto.
3. Notice under s. 143(2) of the Act was issued by the AO and revision of assessment was made. Disallowance of 20 per cent out of the commission/service charges paid by the assessee to its employees was refused as was done in the earlier assessment years by the AO on the ground of pendency of reference at the instance of the Revenue before this Court. Accordingly, the entire commission/service charges paid by the assessee to its employees were disallowed by the AO. The AO permitted deduction to an extent of Rs. 3,66,449 paid as commission to outsiders out of Rs. 8,16,208 for the asst. yr. 1980-81 and after deducting a sum of Rs. 1,60,000 already ordered in the original assessment out of Rs. 4,49,759, a sum of Rs. 2,89,759 was brought to assessment.
4. Aggrieved by the order of the AO, the assessee has preferred an appeal before the AAC, Madras. The assessee had disputed, inter alia, the disallowance of Rs. 4,49,759, claimed as commission/service charges paid to its employees, and Rs. 12,791 towards disallowance under r. 6D of the IT Rules (hereinafter referred to as "the Rules"). The AAC, considering the Tribunal's order in respect of the assessee for the earlier assessment years, sustained the disallowance to an extent of Rs. 40,000 with regard to the commission/service charges, payable to its employees, apart from deleting the disallowance of Rs. 12,791 under r. 6D of the Rules.
5. Aggrieved by the order of the AAC the Revenue preferred an appeal before the Tribunal and the Tribunal upheld the order of the AAC on the ground that there is no warranting circumstances to interfere with the order of the said appellate authority. Aggrieved, the Revenue has sought for this reference for the opinion of this Court.
6. The rival submissions made by the Revenue as well as the assessee were carefully considered in the right of the materials placed before this Court learned counsel for the Revenue would contend that the commission/service charges paid to its employees and claimed by the assessee for the asst. yr. 1980-81 to an extent of Rs. 4,49,759 was disallowed as per the order of the CIT under s. 143(3) r/w s. 263 of the Act, that the assessee is not entitled to claim deduction with regard to the abovesaid turnover and that, therefore, reduction of disallowance to an extent of Rs. 40,000 by the AAC as sustained by the Tribunal has to be set aside.
7. The fact remains that the assessee is a private limited company, carrying on business as agents of various shipping companies for the ports of Madras, Kakinada and Nagapattinam. It is evident from the perusal of the records that the employees of the assessee used to canvass for cargo, etc. for various ships of their principal and for such canvassing, the assessee was making payment either as commission or service charges to its employees, for which deductions were claimed during the previous assessment years and the matter went up to the Tribunal for appropriate relief. The details of the claim made by the assessee towards commission/service charges paid to its employees and the disallowance ordered by the authorities during the earlier assessment years are as follows :
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"Asst. yr. Commission | Disallowed by paid | ITO CIT(A) | Tribunal
---------------|- --------------|------------|------------|-------------
1975-76 | 4,94,530 | 4,94,530 | 2,47,265 | 25,000 1976-77 | 5,11,741 | 4,94,530 | 25,000 | 25,000 1977-78 | 6,29,930 | 6,29,930 | 35,000 | 35,000 1978-79 | 6,49,386 | 1,30,000 | 35,000 | 35,000 1979-80 | 6,85,356 | 1,20,000 | 10,000 | 40,000"
---------------| ---------------|------------|------------|-------------
8. For the assessment year in question also the dispute relating to the payment of commission/service charges went up to the Tribunal and the Tribunal sustained the disallowance to an extent of Rs. 40,000 allowed by the AAC as against Rs. 4,47,759 claimed. It is relevant to point out that the reference relating to disallowance of the claim of the assessee relating to payment of commission/service charges for the asst. yr. 1979-80 was pending before this Court and after considering the pendency of the said reference, the abovesaid conclusion was arrived at by the authorities below. A Division Bench of this Court took note of the claim made by the assessee for deduction towards payment of commission/service charges for the asst. yrs. 1975-76 to 1978-79 and also the order passed by the AAC as well as the Tribunal and sustained the order of the Tribunal. In coming to the abovesaid conclusion, the Division Bench of this Court in T.C. No. 1123 of the 1985, by order dt. 17th March, 1997 [reported as CIT vs. K. P. V. Shaik Mohd. Rowther & Co. Ltd., has observed as follows :
"In each year what would be the expenditure incurred for commission payment depends upon the facts arising in that year. Considering the various facts as stated in the order, the Tribunal has accepted the disallowance of Rs. 40,000 as made by the CIT(A) as reasonable. This conclusion was arrived at on the basis of facts arising in the assessment year under consideration. Since no change of circumstances was shown to us to deviate from the conclusion arrived at by the Tribunal, which was based upon the order passed by the CIT(A), we do not want to interfere with the order of the Tribunal."
9. In the present case also, the Revenue has not brought to the notice of this Court any change in the circumstances to deviate from the conclusion arrived at by the Tribunal, in the light of the decision of this Court referred to above. Therefore, we are of the opinion that the order of the Tribunal has to be sustained.
10. Learned counsel for the Revenue would contend that the deduction of Rs. 12,791 cannot be allowed under r. 6D of the Rules on the ground that the abovesaid rule does apply to directors. But, learned counsel for the assessee would contend that the assessee is entitled to claim the said deduction, that similar conditions of the Revenue have been negatived not only by the AAC, but also by the Tribunal during the earlier assessment years and that, therefore, there is no merit in the contention raised by learned counsel for the Revenue.
11. In CIT vs. Autofin Ltd. , the Andhra Pradesh High Court has held that sub-r. (2) of r. 6D of the Rules places a ceiling on the travelling expenses incurred by an "employee" or "any other person" to be allowed as expenditure, that in view of the expenditure "any other person" used in the sub-rule, even if a director or a managing director is not an employee of the company, the ceiling prescribed by sub-r. (2) of r. 6D applies and that, therefore, the travelling expenses incurred by a director or managing director in excess of the ceiling prescribed under r. 6D(2) are not allowable deduction. It is evident from the decision referred to above that a director or a managing director of a company will come within the expression "any other person" mentioned in r. 6D(2) and deduction can be allowed for the travelling expenses incurred by them within the ceiling prescribed thereunder. Therefore, the contention raised by learned counsel for the Revenue that the Tribunal was not justified in sustaining the deduction of a sum of Rs. 12,791 under r. 6D for the directors of the assessee-company, is acceptable.
12. The decision in CIT vs. Modipon Ltd. , has no application to the facts and circumstances of this case as it deals, inter alia, with the question of law as to whether the provisions of r. 6D will apply to a foreign technician, who is not an employee of the assessee-company.
13. In view of the discussion made above, question No. 1, is answered in the affirmative and against the Revenue. Question No. 2 is not correctly worded in the light of the facts set out by the Tribunal and, therefore, it is reframed as follows :
"Whether, on the facts and circumstances of the case, the Tribunal was right in holding that r. 6D of the IT Rules applies to directors and that no disallowance could be made under the said rule and consequently in sustaining the order of the CIT(A) deleting the disallowance of Rs. 12,751 made by the IAC ?"
14. Accordingly, question No. 2, as reframed, is answered in the negative and in favour of the Revenue. No. costs.